It’s been a tough Q4 thus far for precious metals investors, but a further dovish tone from the Federal Reserve and strong seasonality has finally contributed to some upside progress in the metals. This Wednesday, the Federal Reserve noted that interest rates would remain zero for the foreseeable future, with the possibility to leave rates unchanged until 2023.
The precious metals seemed to like this news, with the price of silver (SLV) up 3% for the day and now up over 10% in December. This is a massive change of character from the 17.5% drop in September, which began this sharp correction. Also, it increases the probability that the lows are now in for the metal at $21.50/oz. Let’s take a closer look below:
(Source: Author’s Chart)
Beginning with the sentiment, we’ve seen a massive sea change over the past two weeks, with bullish sentiment touching 70% bulls this week. This is a significant departure from what we saw just three weeks ago, with bullish sentiment hovering below 20% bulls as we headed into December. While this resurgence in bullish sentiment is a good sign as it suggests that investors are warming back up to the metal, we see a rapid rise in bullish sentiment, and I would prefer to see the metal climb more of a wall of worry.
This does not mean that silver cannot continue its climb higher, but this will be something to watch for in the coming weeks. As shown in previous rallies, the slower the rise from depressed sentiment levels, the better, as markets generally have more durable and long-lasting rallies when climbing a wall of worry.
Rallies driven by a sharp rise in bullish sentiment can move quite quickly, as we saw from silver in 2019, but they’re often ephemeral and run out of gas fast. Therefore, while bullish sentiment isn’t an issue yet, I would prefer not to see bullish sentiment head above 85% bulls before year-end.
(Source: TC2000.com)
Moving over to the technical picture, the yearly chart couldn’t look better, with silver just two weeks away from confirming a multi-year breakout. As of two weeks ago, this breakout was looking like it would be rather luke-warm, barely edging above the prior high of $23.30~/oz. However, as it stands currently, silver has a good shot at closing the year out above $24.00/oz, which would confirm this yearly breakout.
Generally, multi-year breakouts suggest that an asset class is in the early innings of a new bull market. This means that if silver can close above $24.00/oz for 2020, the quarterly and yearly charts will flip to bullish for the first time in over a decade. The last time this occurred was in 2009, and silver was the top performer in 2010, up over 80% for the year.
(Source: TC2000.com)
However, while the long-term charts all remain bullish, the key to getting out of this arduous correction is getting above $26.55/oz on a weekly close. As shown above, silver has run out of gas in this area on two occasions now, and we will need to get back above this broken support level to shift the market from rallies being sold to dips being bought.
Therefore, the next week or two should be a big test for the bulls, with silver now within 4% of this key resistance level. While a failure at this resistance level would not be a huge issue, the bulls now want to see the $24.00/oz level defended on any pullbacks, which would confirm a higher low for silver.
So, what’s the best course of action?
As mentioned, two weeks ago, the depressed sentiment readings were an opportunity to begin nibbling on silver miners. If we get through $26.55/oz on a weekly close, this will provide an opportunity to add to positions. When it comes to silver, I would prefer to wait for a confirmation of the metal getting through $26.55/oz before beginning to buy any dips. This would increase the probability that the short-term correction is over. For now, I continue to see gold as a higher probability setup as it has much less overhead resistance, and I also prefer gold miners to silver miners as they are trading at a 30% lower multiple currently.
Therefore, while I remain bullish long-term on silver, I have not started any positions in the metal yet. Instead, I see the best way to play the metal being Wheaton Precious Metals (WPM), with any dips below $43.00 being low-risk buying opportunities.
Disclosure: I am long GLD
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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SLV shares were trading at $24.00 per share on Thursday morning, up $0.38 (+1.61%). Year-to-date, SLV has gained 43.88%, versus a 17.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.
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